Tag Archives: New Business setup

Quick Guide to Business Entities

Entity

Advantages

Disadvantages

Proprietorship

    

 

 

 

1) Easy to form and simple to operate.
2) Easy to sell assets.
3) Fewer administrative burdens.
4) All taxation to owner.
1) Limited source of capital.
2) No limited liability for owner.
3) No continuity past proprietor.
4) All net income is subject to self-employment (SE) tax.

Partnership

 

 

 

 

 

 

 

 

1) More sources of capital and more management resources.
2) Less administrative burdens than corporations.
3) Pass-through taxation; special allocations allowed.
4) Limited partners have limited liability and no SE tax.
1) Transfer of interests is more difficult than stock or limited liability units.
2) Each general partner is personally liable.
3) General partners’ net income is subject to SE tax.
4) Complexity of partnership tax rules; restrictions on choice of tax year.

C Corporation

 

 

 

 

 

 

 

1) Can raise capital with stock sales.
2) Owners have limited liability.
3) Corporations have perpetual life.
4) Ease of transferability of stock.
5) More management resources.
1) Earnings subject to double taxation.
2) Administrative burdens.
3) Somewhat difficult to form and to dissolve.
4) Borrowing often requires shareholder guarantees.
5) Potential double taxation on dissolution.

S Corporation

 

 

 

 

 

 

 

 

 

 

1) Pass-through status avoids double taxation.
2) Owners have limited liability.
3) Individual tax rates may be lower than the applicable
corporate rates.
4) Distributions from the S corporation are exempt from
payroll taxes (assuming adequate compensation to
employee-shareholders).
1) Number of shareholders limited to 100; no corporate, partnership or nonresident alien shareholders. Only one class of stock permitted.
2) Lack of tax-free fringe benefits to greater-than-2% shareholder-employees.
3) Individual tax rates on the pass-through income may be higher than applicable
corporate rates; restrictions on choice of tax year.
4) Shareholders must directly invest to have basis to claim losses; guarantee of entity debt is insufficient.

Limited Liability
Company

 

 

 

 

 

 

 

 

1) All members have limited liability.
2) No limit on number or types of members.
3) Pass-through taxation under partnership rules.
4) Member distributions can include special allocations.
5) Members may participate in management.
6) Different classes of ownership may be permitted.
1) May have a limited life. Tax year choice restricted if taxed as partnership.
2) Transferability of interests may be limited.
3) LLC laws vary from state to state.
4) LLC liability protection is relatively untested in the courts.
5) Members who have management authority, who have debt responsibility or who
materially participate may be exposed to SE tax